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National Australia Bank Ltd (ASX:NAB) shares tipped to sink lower: Should you sell?

It has been another disappointing day of trade for the National Australia Bank Ltd (ASX: NAB) share price. The banking giant’s shares finished the day with a decline of 0.2% to $27.87.

Unfortunately, as far as one leading broker is concerned, its shares could continue to slide lower from here.

According to a broker note out of Morgan Stanley, its analysts have given National Australia Bank’s shares an underweight rating and a lowly price target of $26.40. This price target implies potential downside of approximately 5%.

Why is the broker bearish on National Australia Bank?

While Morgan Stanley isn’t overly positive on any of the banks, it is particularly bearish on National Australia Bank due to its belief that it could struggle to reach APRA’s CET1 ratio target of 10.5%.

In its recent third quarter update the bank had a CET1 ratio of 9.7%.

This compares to Westpac Banking Corp (ASX: WBC) and its CET1 ratio of 10.4%, Commonwealth Bank of Australia (ASX: CBA) with its CET1 ratio of 10.1%, and Australia and New Zealand Banking Group (ASX: ANZ) and its CET1 ratio of 11.1%.

In order for National Australia Bank to reach APRA’s target by the deadline of January 2020, the broker believes the bank will have to consider capital management initiatives.

Morgan Stanley suspects that this could mean a cut to its dividend in FY 2019. It has forecast a 12% decline in its dividend to $1.74 per share from the current dividend of $1.98 per share.

Should you sell?

While I do agree that a dividend cut may need to happen, I wouldn’t necessarily be in a rush to sell the bank’s shares if I were already a shareholder.

Not that I would be rushing in to buy its shares at this level if I didn’t own them. I would sooner buy the shares of Westpac and ANZ Bank ahead of National Australia Bank as I believe they are better value for money right now.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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